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Content vs. Advertising: The Impact of Competition on Media Firm Strategy

  • David Godes

    ()

    (Harvard Business School, Soldiers Field, Boston, Massachusetts 02163)

  • Elie Ofek

    ()

    (Harvard Business School, Soldiers Field, Boston, Massachusetts 02163)

  • Miklos Sarvary

    ()

    (INSEAD, 77305 Fontainebleau, France)

Registered author(s):

    Media firms compete in two connected markets. They face rivalry for the sale of content to consumers, and at the same time, they compete for advertisers seeking access to the attention of these consumers. We explore the implications of such two-sided competition on the actions and source of profits of media firms. One main conclusion we reach is that media firms may charge higher content prices in a duopoly than in a monopoly. This happens because competition for advertisers can reduce the return per customer impression from the ad market, making each firm less willing to underprice content to increase demand. Greater competitive intensity may thus increase content profits and decrease ad profits. These findings are in sharp contrast to those in a regular one-sided product market, in which competition typically lowers product prices and profits. We extend the framework to examine competition across different media (e.g., between magazines and cable TV) and show that firms in a duopolistic medium may benefit from more intense competition from a monopolist in another medium. We characterize the conditions for each firm in the duopoly medium to bundle more ads and earn greater total profits than the rival firm in the monopoly medium.

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    File URL: http://dx.doi.org/10.1287/mksc.1080.0390
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 28 (2009)
    Issue (Month): 1 (01-02)
    Pages: 20-35

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    Handle: RePEc:inm:ormksc:v:28:y:2009:i:1:p:20-35
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    1. Esther Gal-Or & Anthony Dukes, 2003. "Minimum Differentiation in Commercial Media Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 291-325, 09.
    2. Kaiser, Ulrich & Wright, Julian, 2004. "Price Structure in Two-sided Markets: Evidence from the Magazine Industry?," ZEW Discussion Papers 04-80, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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    7. Chaudhri, Vivek, 1998. "Pricing and efficiency of a circulation industry: The case of newspapers," Information Economics and Policy, Elsevier, vol. 10(1), pages 59-76, March.
    8. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    9. Anthony J. Dukes, 2006. "Media Concentration and Consumer Product Prices," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 128-141, January.
    10. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, June.
    11. Yuxin Chen & Jinhong Xie, 2007. "Cross-Market Network Effect with Asymmetric Customer Loyalty: Implications for Competitive Advantage," Marketing Science, INFORMS, vol. 26(1), pages 52-66, 01-02.
    12. Yong Liu & Daniel S. Putler & Charles B. Weinberg, 2004. "Is Having More Channels Really Better? A Model of Competition Among Commercial Television Broadcasters," Marketing Science, INFORMS, vol. 23(1), pages 120-133, July.
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